Foolish Forecast: The Akamai Jackpot

I've got online-content-delivery fever, and Akamai (Nasdaq: AKAM  ) is to blame. The inveterate caching network provider reports second-quarter earnings tonight. Akamai disappointed the Street last quarter, which fellow Fool Tim Beyers compared to feeling bad when you miss a $162 million Powerball jackpot.

The stock is down about 10% since that report. Let's see whether that's a sign of troubled times or a jackpot of a buy-in opportunity.

What Fools say:
Here's how Akamai's CAPS rating stacks up against some of its peers and competitors:

 

Market Cap (in billions)

Trailing P/E Ratio

CAPS Rating (out of 5)

AT&T (NYSE: T  )

$182.9

14.0

****

Level 3 Communications (Nasdaq: LVLT  )

$5.5

N/A

****

Akamai

$5.2

47.5

****

Citrix Systems

$5.0

26.2

****

Limelight Networks (Nasdaq: LLNW  )

$0.3

N/A

**

Data from Motley Fool CAPS as of July 30.

Most of our CAPS players like Akamai's chances of outperforming the market, as evidenced by a 95% approval rating among more than 2,100 ratings. "Best time for buying a great company" is the laconic verdict from All-Star player julianwain.

The only negative CAPS comment on Akamai in the last two months is a 959-word essay by Internettech that boils down to a shrinking business moat and overblown valuation: "Akamai is now facing the biggest competitors it has ever faced in its 10 years of existence. The MIT buzz that ... their math is somehow better just isn't true any longer."

What management does:
The dwindling gross margins could be a problem, but expanding net profits and cash flows make it tough to worry about the gross. Sales growth is tapering off a bit at the moment, presumably due to an economy that doesn't encourage large investments in network infrastructure -- but keep in mind that the company is on a three-and-a-half year expansion spree with at least 30% annual sales growth since 2004.

Margins

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Gross

82.0%

80.7%

79.1%

77.6%

77.7%

76.8%

Operating

23.4%

23.0%

23.3%

23.7%

26.8%

28.7%

Net

13.4%

13.6%

14.3%

14.8%

15.9%

17.3%

FCF/Revenue

17.5%

17.0%

14.3%

17.2%

24.2%

28.5%

Growth (YOY)

12/2006

3/2007

6/2007

9/2007

12/2007

3/2008

Revenue

51.4%

52.0%

51.2%

50.1%

48.5%

43.4%

Earnings

62.0%

64.2%

72.5%

77.6%

68.4%

76.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Online video is commonly cited as a growth driver for Akamai and its peers, and services like Google's (Nasdaq: GOOG  ) YouTube and video rentals from Apple (Nasdaq: AAPL  ) iTunes will drive growth in the content delivery space for the next few years. But don't forget about video games. Multiplayer gaming across the Internet can benefit greatly from a distributed network model like Akamai's, and both Nintendo and Microsoft (Nasdaq: MSFT  ) power their online communities with Akamai backbones.

As well-reasoned as Internettech's arguments are, I have to side with julianwain and the other bulls on Akamai. This is much more than a simple stack of network routers in strategic locations, and the wealth-building growth story here is far from over.

Microsoft is a Motley Fool Inside Value pick. Google and Akamai Technologies are Motley Fool Rule Breakers selections. Nintendo and Apple are Motley Fool Stock Advisor recommendations. Try any of these Foolish newsletters today, free for 30 days. Or just sign up for a free CAPS account to find out more from your fellow Fools quoted above!

Fool contributor Anders Bylund owns shares of Akamai and Google, but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.


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